Good afternoon. Welcome to Duos Technologies Second Quarter 2023 Earnings Conference Call. Joining us for today's call are Duos' CEO, Chuck Ferry; and CFO, Andrew Murphy. Following their remarks, we will open the line for your questions. Then, before we conclude today's call, I'll provide the necessary cautions regarding the forward-looking statements made by management during this call. Now, I'd like to turn the call over to Duos' CEO, Chuck Ferry. Sir, please proceed.

Welcome, everyone, and thank you for joining us. Earlier today, we issued a press release announcing our financial results for the second quarter as well as other operational highlights. A copy of the press release is available in the Investor Relations section of our website. I encourage all listeners to view that release as well as our 10-Q filing with the SEC to better understand some of the details we'll be discussing during our call. Now, let's get started. About two weeks from now, September 1, I will have served as CEO for Duos Tech for three years. For those that know me, I have successfully led turnarounds with several businesses and military organizations over the past 35 years, and instinctively have learned to recognize when an organization is turning the corner and is now ready for primetime. Duos Tech is very much ready for primetime and looking forward is in the best position ever, with a clear pathway in the next 12 to 24 months to achieve our strategy and achieve financial profitability. There are two key things investors should be watching right now. The first is the Railway Safety Act which is steadily making its way through Congress. If passed, this bill will call for the FRA to write regulations on the use of wayside detection systems, which includes our technology. Since the derailment in East Palestine, Ohio six months ago, our commercial inquiries have skyrocketed. My sense is that regardless of whether this bill passed or not, Duos also benefit from the renewed focus on safety across the industry. We are currently in discussions with all the Class 1s, and many car owners and shippers about how they can benefit from our railcar inspection portal. We have had the opportunity to highlight our technology and benefits to…

Thank you, Chuck. I'll now briefly walk through our second quarter results before expanding on my view of the business. Total revenue for Q2 2023 decreased 51% to $1.77 million compared to $3.62 million in the second quarter of 2022. Total Revenue for Q2 2023 represents an aggregate of approximately $870,000 of technology systems revenue and approximately $900,000 in recurring services and consulting revenue. For the first six months of 2023, total revenue decreased 13% to $4.41 million from $5.06 million in the same period last year. Total revenue for the first six months of 2023 represents an aggregate of approximately $2.7 million of technology systems revenue and approximately $1.72 million in recurring services and consulting revenue. The decrease in total revenue for both periods was driven by the certain external site factors of the customer that have delayed delivery of two high speed rail inspection portals. Growth in the services portion of revenues was driven by the successful completion of two freight RIP railcar inspection portals earlier this year, as well as the deployment of additional artificial intelligence detections and represents services and support for those detections. Cost of revenues for Q2 2023 decreased 33% to $1.56 million compared to $2.33 million for Q2 2022 following a similar trend with revenue. The declining cost of revenues was mainly attributable to the company bearing the initial cost of procurement and allocation material for two high speed RIPs for transit customer in Q2 2022 without related spin in Q2 2023. The marginal increase in cost of revenues from services and consulting was attributed to higher labor costs, as well as cost associated with two new portals coming online during early 2023 as opposed to the corresponding period to 2022. For the first six months of 2023, cost of revenues increased 3%…

Thanks, Andrew. As we have discussed on this call and during previous ones, expanding from a CapEx only business to a heavier mix of subscription is critical for the long term but there are short term pressures on revenue and risk of timing. As such, let's discuss the subscription strategy and progress made implemented. In July we implemented our first subscription services agreement with a passenger rail - passenger transit operator. The agreement renewable annually is initially valued at $300,000 per year and encompasses customer training, installation and railcar data services across three existing Class 1 portals. This is important because this customer is very thoughtfully planning and testing while they will use the safety data from our solution to improve overall operating schema. This is in preparation for when they expect to further expand the use of portals and combination of CapEx and subscription formats. We are currently awaiting a decision award with a short line rail operator to install subscription portal in the Southeastern United States later this year. This multi-year deal will allow for multiple subscribers and includes a partnership where Duos can validate new technology and live portal. We're also awaiting notice from existing classroom customers for additional portals as part of their FY '24 capital budgets which are being formulated at this time. We are currently working with a number of car owners and shippers who have expressed strong interest in subscriptions to assist them in the best ways to incorporate the data into their operations. On the surface, car owners and shippers may seem the same, but in reality, each has its own operational challenges and we are finding our subscription offering is very flexible in providing what they need now and capable of expanding in the future. As I've mentioned previously, we are…

Thank you. [Operator Instructions] Our first question comes from Mike Latimore with Northland Capital. Please proceed with your question.

Hi, this is Aditya on behalf of Mike Latimore. Could you give some color on what would be the revenue mix between services and systems revenue for this year?

Yes, this is Chuck. Thanks for the question. I'll kind of start this out. I think, one of the - when we start with this question - this is kind of, how do we feel about the rest of the year. And then I'll let Andrew kind of talk about what that mix looks like. I would say look, basically, we are planning to meet our 2023 guidance through a mix of existing contract mods, and installation of at least two more portals by the end of the year. And I would note that we already have about $1.5 million worth of the long lead items on hand. For these two portals, and were active discussions with several customers who want them before year end. And I'll turn it over to Andrew to maybe talk about what that mix looks like.

Sure, I think to Chuck's point, we will still have a very heavy CapEx focus in the second half of the year. However, right now, we are undertaking several strategic initiatives that have allowed Duos to very quickly phase into the subscription program. And so, I think while it may not be a significant or meaningful amount of overall revenue by the end of this year, I expect we're going to be establish a large recurring base for future years for our subscription program. So I think in 2022, we had an 80%, 20% split between CapEx and recurring revenues. We anticipate that that will grow especially in the latter half of 2023 but we expect some of those results to bear more fruit going into 2024.

All right. And could you also give some more color on the portal cashless buyback?

Yes, we'll talk about it in concept just because we're in discussions at this point and certainly those are sensitive and we will not talk about the customers themselves. But basically the concept is that look, we have customers that have purchased portal - existing portals. And obviously, we provide services and maintenance and software licensing for those on a recurring basis. The concept is that they would return ownership for those portals to us, we would then own and operate and basically run them as a turnkey solution to them. Part of that would include providing technology updates for them, in some cases, introducing new subsystems that are being developed right now. And basically, then being able to more rapidly respond to those sorts of things. The concept though is, that we would basically provide services for that base customer, if you will, with services in kind for the next few years to basically, pay down the buyback price. So this has been very favorably - very favorably received. And we're in active discussions. And I'm hopeful to be able to, announce maybe in the next few months success with that, which will accelerate our subscription efforts.

All right. Thank you.

[Operator Instructions] Our next question comes from Ed Woo with Ascendiant Capital Markets. Please proceed with your question.

Yes. Thank you very much for taking my question. My question is very, on a very general topic, AI, you guys been obviously using it in your technology for a long time, it's getting a lot of buzz. But can you just quickly talk about how you guys are able to, advance it and make your product even better so that everybody kind of knows your involvement with it? Thank you.

Yes, so we've talked to both of this format, and others were currently right now - in the machine vision, wayside detection area Duos is the only company that does - that performs, basically all of the necessary at tasks to produce good AI. And by that, I mean - our solution, we control of our proprietary aspects of all the hardware, software, IT and artificial intelligence. There are other - there are some plus one customers and others out there that are using some other machine vision technology from competitors. What they are having to use third-party AI providers. So what they're having to do is they're basically they're not in control of all aspects of AI. This is very, very important, because in this machine vision AI for moving railcars, any small slight changes that you make, in the hardware, the software, the IT and the AI will offset and cause the AI to not perform very well. And so, and this is feedback we're getting from some of the Class 1 operators that use our competitors equipment. So the big difference and advances for us is that we sell perform it all in-house. We have a very experienced team that also includes mechanical car inspectors in our AI development team. It's not a very large team, but it's a very, it's a very talented team. And the other key aspect is our current customers, participate and provide excellent information and data points for us to make sure that the AI that we develop is meaningful. It's focused on things that cause derailments and it's directly correlated to FRA and AAR mandated inspection points. I hope that answers your question.

Yes, thank you very much. And I wish you guys, good luck. Thank you.

I appreciate. Thank you. We will wait for the next question. Go ahead.

Okay. Management will now take select listeners submitted questions?

Yes. Thank you. So, we've had a couple of questions kind of come in over the last week or so. One of the questions that we have right now is - the question is do you expect the recent derailments to drive more sales in the next 12 months? You know, look, the rail industry Duos Tech included it and all of our current customers' safety is absolutely paramount and first and foremost, in front and center for the entire industry. I would say that, since the East Palestine events made us certainly put a lot more focus and emphasis on rail safety, there's considerable efforts in Congress right now, to pass the bill. Congress of course is in recess right now, but we have been told when it comes out of recess, certainly the Senate will hear the bill on the floor during the month of September. But I think even regardless of that, you're going to see a drive to adopt more technology like ours on a go forward basis. I think now that the FRA and Transport Canada, as well as some of the labor unions have gotten more familiar with our technology and others like it, I think they're starting to get more comfortable with it, and the pace is going to pick up regardless. So, we never want to see more derailments. But I think it's certainly going to be our focus on a go forward basis. Another question we have here is, and I think I'll let Andrew take this one is what does success look like for the business here over the next couple of quarters?

Yes, that's a great question. I think success for us looks like a combination of CapEx sales, as we mentioned in earnings call, which will continue over the next several years and - just continuing to be a core component of our business. But expansion of our offerings with our existing customers, but really a continued focus on our recurring revenues. While CapEx is certainly valuable to us and helps in terms of the near term revenue recognition, and will continue to be a part of that offering. The company really wants to continue to focus on that recurring revenue, with a target to grow recurring revenues to 50 plus percent of annual revenue or more. While this won't happen overnight, we do believe we are laying the groundwork with strategic initiatives in 2023. As we talked about earlier, in 2022 our recurring revenues without subscription customers was approximately 20% of our total revenue and we believe we can grow that figure out significantly. Coupled with that, we will also be able to achieve a sustainable breakeven on both cash flow and net profit as we phase into subscription model.

Yes, I'll do one more here and then we'll turn it back over if there's any more questions. But this question came in, again, asking for a bit of an update about the proposed legislation that's making its way through Congress, the Railway Safety Act. And what's the likelihood of the FRA mandating automated inspections? I just want to remind our investors and those who will read the transcripts afterwards. At this moment, right now, the FRA does not currently have any regulatory authority over the use and deployment of wayside detection devices. That is largely left in the hands of the Class 1 railroads and other rail operators to employ those systems. So if this bill it to pass - will pass, there's a section in there that's very specific, that the FRA more importantly, the Department of Transportation Secretary will be required to within one year to write a regulation that will - write a set of regulations and standards around the use of wayside detection devices. And it's our understanding that the wayside detection devices will not just be - it will be heat detection devices, impact detection devices, and also machine vision and camera detection devices. So again, this is kind of a big deal if it does pass. But again, I think the industry is already headed this direction anyway. And so regardless of the bill, our strategy remains solid, regardless whether it passes or not. So operator, I'll turn it over to you. If we have more questions, we'll take them, but if not, we'll turn it back over to you for closing statements.

At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Ferry for his closing remarks.

Thank you, operator and thank you everybody for joining. Again, I also very much appreciate, our shareholders, our current shareholders, especially our long-term shareholders who have been very, very supportive of us and understand the potential that we have. And you know what this new model means for us in terms of value. So thank you everybody for attending, and I'll turn it back over to our moderator to complete the call.

Before we conclude today's call, I would like to provide Duos' Safe Harbor statement that includes important cautions regarding forward-looking statements made during this call. This earnings call contains forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Forward-looking terminology such as believes, expects, may, will, should, anticipates, plans and their opposites or similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based, and could cause Duos Technologies Group actual results to differ materially from those anticipated by the forward-looking statements. These risks and uncertainties include, but are not limited to those described in the item 1A in Duos Annual Report on Form 10-K, which is expressly incorporated herein by reference, and other factors as may periodically be described in Duos filing with the SEC. Thank you for joining us today for Duos Technologies Group second quarter 2023 conference call. You may now disconnect.